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Oracle Corp Japan
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[Foreign Language]
Thank you, Nishio-san. So I'm pleased to announce the results for the first half of FY '20 fiscal year. [Foreign Language]
So revenue for 6 months ending November 30, 2019. Our revenues are JPY 97.485 billion, growing at 6.8%; ordinary income at JPY 30.046 billion, growing at 8% year-over-year.
If I talk about the segment income...
[Foreign Language]
Yes.
[Foreign Language]
Our cloud license and on-premise license at JPY 20.446 billion grew 11.5% year-over-year. [Foreign Language] Our cloud services and license support at JPY 58.053 billion grew at 6.8% year-over-year. [Foreign Language] As you can see, that we had a very strong license quarter. [Foreign Language] And we continue to have very high support renewal rates. [Foreign Language] We also had a good hardware quarter, with the revenues growing 4% for Hardware systems. [Foreign Language]
Overall, we are very pleased with second quarter -- with the first half and second quarter in particular. We continue to see demand across all segments of the market. Our cloud business continues to grow. The Tokyo data center, we have seen very, very high usage after it has been set up. [Foreign Language]
We will continue to maintain our guidance for the year for revenue growth of 1% to 5%. [Foreign Language] We do believe that we will continue to have a strong second half. [Foreign Language] And as you can see from the results for first half overall, there's overall strength where margins continue to be at plus 30% levels. [Foreign Language]
With that, I will open up the call for questions. Thank you. [Foreign Language]
[Foreign Language]
[Foreign Language] So let me ask the 3 questions. The first one is could you talk about -- company said that -- second quarter, that the company saw the large -- continued large projects order takes. Could you provide more color what Oracle Japan is successful about getting the large deals, please? This is my first one. [Foreign Language]
Oracle has a presence in the Japan market across all our market segments. [Foreign Language] So we have -- the way we segment our market is large enterprise, medium -- and medium enterprises and small and medium businesses. [Foreign Language] We continue to see big demand from large corporations in Oracle in Japan. [Foreign Language] Although this quarter did not -- I cannot say that this quarter had too many large transactions. We had a few, but at the same time, the spread was evenly. The -- it was consistent run rate as we see in our previous quarters across all market segments. [Foreign Language] Generally, the makeup of our revenue is that we have a few large deals, and then we have a lot of small deals that make up the whole revenue. [Foreign Language] I hope that answers your question. [Foreign Language]
Well, then I have a one quick follow-up on this one. Because I saw very strong -- the license revenue increase for this quarter, and I assume that it was driven by the large projects. Am I reading the number wrong? [Foreign Language]
If you see our numbers for the last, let's say, 3 quarters from Q4. Q4, we had an extremely strong license quarter what -- which was driven by there were some significantly large deals there. Q1, because we softened so much in Q4, Q1 was a slightly slow quarter for us in terms of license revenues. And then as we recover the pipeline as we work through our demand for the current year, you can say that we did close a few big deals as well this quarter, but what I said is true. It's not a different story. Every quarter, we have a few large ones and a bunch of small ones that make up our revenues, so I will -- I don't think I can say that this quarter was only dominant because of large deals. [Foreign Language] Thank you. [Foreign Language]
Very much understood. And now to the second question. You mentioned about a there's good pickup at the data center of Tokyo. Could you provide more color? Is it above your expectation? And if it's so, what sort of the demand is specifically driving the above-expectation achievement? [Foreign Language]
So let me answer this question in this way. When we set up our data center, we had already set up expectations with our customer that we are coming up with a local data center. [Foreign Language] At the time that we launched the data center, we already had a pipeline that would support that data center at that time. [Foreign Language] So when we launched the data center, we could book a lot of customers very quickly onto that data center. [Foreign Language] So in a way, you can say, although we were expecting a big demand, but even that expectation, we thought that the end result was even slightly better than that. [Foreign Language] Does that make sense?
Yes.
Thank you.
My last one. Now to the balance sheet, there is another JPY 30 billion increase in the lending. I believe it's to the parent company. Could you talk about thinking process behind it? And could you also discuss the outlook of shareholders' return as most of the cash generated -- being generated is now being sent to the parent company? [Foreign Language]
So back in February, when we executed the loan agreement, we had executed the agreement for JPY 160 billion. [Foreign Language] At that time, we executed the transaction only for JPY 130 billion. [Foreign Language] And so now in this quarter, we executed the remainder of the agreement for JPY 30 billion. [Foreign Language] So the loan period still continues to be 2 years from the start of the agreement, which was in February. [Foreign Language] So there was nothing, so there was no additional agreement or transaction that we executed this quarter. [Foreign Language] Apart from transferring the balance from the original agreement. [Foreign Language] As you know, the interest rate regime in Japan is not that friendly. It's very difficult to keep money with the banks here. [Foreign Language] We are a very conservative company when it comes to managing our cash. [Foreign Language] So we [ pass this ] with our parent company, who is a extremely safe investment for us at market interest rates. [Foreign Language]
We continue to discuss shareholder return opportunities in our Board. And as and when there is a decision on something, we will let the markets know. [Foreign Language] And I repeat: As I said the last time, this is a very flexible arrangement. If we have use for cash, we will ask them to send it back. [Foreign Language] Thank you. [Foreign Language]
Congratulations on the strong results.
Thank you.
[Foreign Language]
[Foreign Language]
[Interpreted] I have 2 questions. I am Kikuchi from SMBC. I have 2 questions. I -- my first question has to do with license revenues. I do believe, back in Q4 of last fiscal year, you specifically had a large deal because the license revenues did go up, and same with Q2. The license revenue has gone up. And apparently, since, well, Q1 was slow, I do believe that you had to a certain extent large deals in this second quarter. So my question is your perspective of large deals into Q3 and Q4. [indiscernible].
Thank you for the question. I already said at the beginning of my call my revenue guidance remains unchanged at 1% to 5%. [Foreign Language] We look forward to a strong second half. [Foreign Language] It is very difficult to say at this point that -- whether I will have a large deal or not in the second half. [Foreign Language] We continue to work with a lot of big customers. [Foreign Language] For -- with this transformation with our software, which as you know is used for mission-critical systems. [Foreign Language] And we continue to work on both large and small opportunities across all segments as we plan to deliver those for the second half of the year. [Foreign Language] Our deals are very complex in nature. [Foreign Language] So we -- it's -- and it take times -- it takes a lot of time to build them. [Foreign Language] Having said all of this, as I said, I stick to my guidance for the year. And I think we will continue to deliver a good second half. [Foreign Language] Thank you.
[Interpreted] My second question has to do with cloud service and license support. Compared to last, year-on-year basis, the growth rate has become smaller. And also quarter-on-quarter basis, this slightly coming up, but you mentioned that, license support, the renewal rate has continued and your data center is achieving over expectation. Nevertheless, quarter-on-quarter, it is declining. So if you think that your second quarter or this current situation is strong or solid, that can be interpreted as saying that we cannot expect so much into the future. So if you could break down a little bit and unpack a little bit to explain to me the current situation, that will be helpful.
I have always maintained that, in looking at our numbers on a quarter-on-quarter basis, it's a very incorrect way to look at our business. I always tell people or tell my analysts, whoever speaks to me, to look at it on a 4-quarter-rolling basis. And we don't see any slowdown. As you can see, we have been growing our license revenues quarter-on-quarter almost every quarter for the last 7 or 8 quarters. There is -- there continues to be a strong demand for on-premise license because the customers can actually deploy the on-premise license that they buy on our cloud also. If they buy on premise, they can deploy the license on their own data center, on their on-premise data centers; or we can deploy on our cloud. So we do not see that sort of a slowdown. And our -- as I said, our support renewal rates continue to be constant. In fact, they have improved this quarter. When I look at our support renewal rates, this quarter is slightly better than what we did last quarter. So I don't anticipate that kind of a slowdown that -- what you're talking about. [Foreign Language]
So we have no doubt in our mind with our new cloud services on the data center; and with the new data center we'll have launched in a few months, in January. Our positioning is extremely strong in the market. Our license revenues will continue to grow. Our cloud services are growing, so we are ideally positioned to exploit the demand for both on-premise and cloud revenues in the Japanese market. [Foreign Language] Thank you very much. [Foreign Language]
[Interpreted] Understood. However, license may be year-on-year. And however, cloud is not a year-on-year, and it should be looked at as quarter-over-quarter. And that has been the case for 20 years, so I believe the company should be explaining about the current situation on quarter-on-quarter basis. That was the comment I'm looking for in the answers.
Yes, yes. No, but you're right. You can say that cloud revenue -- it's right. Separately, if you look at cloud revenue separately if -- and I don't break that for you, right. As a company, we don't break that. That's our rule at this point. Cloud revenues, yes, quarter-over-quarter we can look at it, but when we are looking at the whole entire thing, we tend to look at rolling 4 quarters because for us that gives us a much better picture than quarter-over-quarter. [Foreign Language] Actually, one more point on that, Kikuchi-san: The better way to look at ARPU is to look at it at a total revenue basis. If you start breaking down segments, it will not make sense to anyone because one customer, we -- so we are basically entrenched into customer's entire software and hardware ecosystem. So when -- we sell cloud. We sell on premise. We sell hardware. We sell consulting services to the same customer, so you have to look at it on our total portfolio basis. That's -- that will be my submission to you. [Foreign Language] Thank you.
[Foreign Language]
[Interpreted] So this is Tanaka-san from Mitsubishi UFJ Morgan Stanley. I have a question regarding a loan agreement. You mentioned that, yes, indeed Japanese banks do not have a favorable interest rate. So you have executed JPY 130 billion in loan back in February. However, looking at the interest received, it doesn't seem that you are getting a favorable deal there, so my question is why. And related to the loan agreement, I think the longest will go on until March 8, 2021. And so if it's being executed and if you're receiving the interest-rate interest, then it should have an impact on the -- on operating income, but it seems like the impact is very minimal. So what is your thinking
[Audio Gap]
So if you could delve into this a little more. Let's say, do you have like a request from your parent company with this loan agreement? What is the background?
Thank you for the question. You -- so we -- all our transactions with the parent company are arm's length transactions. They are audited. They are subject to tax or tax audits as well. And I can assure you that the loan has been executed at market rates. And so I don't see any problems in that arrangement. [Foreign Language] Normally, Japanese banks ask for a negative -- they take money from you if you keep so much money in their banks. [Foreign Language] So I really don't know how you are calculating these amounts. [Foreign Language] Thank you. [Foreign Language]
[Foreign Language]
[Interpreted] This is [ Tanaka ] from Nomura Securities. There are 3 questions. First question have to do with the head count. In the first quarter -- or compared to first quarter, head count have come down in second quarter. I recall that for cloud sales you had increased the number of head count in the first quarter, but if you could explain to me why the number has come down in second quarter. Is it temporary? Or is it due to higher attrition rates? And also your perspective of head count into the second half.
Thank you. As a company, we are always looking at rightsizing and optimizing our operations so that we can offer maximized shareholder value. [Foreign Language] So in general, you should see our head count going up mostly. [Foreign Language] But at times when we see that, let's say, we have overinvested in some function or we think that one of our businesses is not making sense anymore, we try and rightsize that function. [Foreign Language] Also, in general, we have observed that we normally face slightly high attrition in the first and the beginning of the second quarter of every year.
First...
First and the second quarter of -- in the beginning of every year. [Foreign Language] So I will just read it as a business-as-usual thing. If you look at where we were about 12 months back, we are still at least 100 to 150 heads higher than that. [Foreign Language] Thank you. [Foreign Language]
[Interpreted] So let me confirm. The situation where you are losing people to the competitors, that is not the case.
Well, yes, we lose people to competitors. We get people from competitors. That is how the industry works. I lose to Microsoft. Microsoft loses to me. We lose to Amazon. Amazon loses to me. In the software industry -- if I look at our top management team, all of them were both then HP, IBM, some of them in Microsoft. And if you go to Microsoft, you'll have the same story. [Foreign Language] Does that answer your question? [Foreign Language]
[Foreign Language]
[Interpreted] My second question has to do with cloud ERP penetration, the market situation. Gradually, the global revenue regarding cloud ERP is coming up, so I was wondering about Japan market when it comes to cloud ERP. What is the situation? And I also heard that U.S. Oracle is saying that in mid-market there is a migration from SAP to Oracle. So if you could comment on that a little bit as well.
So ERP is a very strong growth story for us. [Foreign Language] We are actually the only vendor that can offer ERP systems on the cloud for both large and small enterprises. [Foreign Language] We have fusion ERP systems for large and medium-size enterprise. [Foreign Language] And we have NetSuite offering for the SMB segment. [Foreign Language] We are seeing very good penetration in the Japan market, and we will continue to see that in the future. [Foreign Language] We are also recognized as market leaders in cloud ERP in Japan. [Foreign Language] Thank you. [Foreign Language]
[Interpreted] So I have a follow-up question. You mentioned that in Japan cloud ERP is growing. So is it mainly from -- mainly because your existing customers are going to cloud? And also once again, I'm sorry. I'm kind of particular, but are you taking customers from SAP? And also in Japan, will your competitor as regards to cloud ERP be Workday?
So firstly, we don't see Workday as a competitor in Japan at all. We don't see them anywhere. Secondly, we -- our ERP customers are -- it's a broad range of customers. Firstly, it is our own installed base customers. [Foreign Language] A lot of mid-market SAP customers have started showing interest. [Foreign Language] We are having a conversation with a lot of SAP customers, existing SAP customers, who are at the end of life for their systems. [Foreign Language] We also think in Japan there is a large greenfield out there where companies do not have a standard global ERP or ERP system implemented for them. [Foreign Language] There is a lot of customers who are sitting on bespoke systems implemented by a lot of system integrators in Japan. [Foreign Language] We see all of that as a great market opportunity for us. [Foreign Language] And we expect strong growth from our cloud ERP offering. [Foreign Language] Thank you. [Foreign Language]
[Foreign Language]
[Portions of this transcript that are marked [Interpreted] were spoken by an interpreter present on the live call.]